"The best time to plant a tree was 20 years ago. The second best time is now."
On Sunday, I came out of my cocoon and wrote a piece about my reaction to the monetary policy applied to combat the current market meltdown. Surprisingly, the reaction has been overwhelmingly positive. More people than I thought are in enough distress to actually reach out and listen to my opinion. So this time, I want to write something more actionable. Before I shed some more "unsolicited advice", I just want to make a few disclaimers.
Disclaimer:
I don't work in the financial service industry and I don't hold any official credentials to make any recommendations. I have a degree in mathematics and previously worked as an analyst. I've invested on my own and for others. And I have paid my tuition to the market with hard-earned dollars in the past. I have since transitioned into the startup/venture world.
But I also don't have any vested interest in giving you any particular advice. 100% of this is my opinion and my own analysis based on both data and anecdotal evidence. And I will give it to you as straight and as honest as possible.
Predictions:
Things will get better. It's a matter of time. But in order to make any actionable predictions, we need to put a time stamp. And since nobody is foolish enough to do it, I might as well try.
The current market turmoil is caused by a few factors that all happened at the same time which caused a perfect storm. An overdue correction after the historical bull market was trigger by an oil war. Then the Covid-19 pandemic hit the globe and the world economy came to a halt. The outcome of this turmoil will now depend on both the evolution of the pandemic and the extend of the economic impact caused by a quasi-total shutdown that we have never experienced.
Covid-19:
The virus's fear will fade soon. But it will get worse before it gets better. Based on the numbers from China and South Korea, and the starting date of their quarantine, my educated guess is that the number of newly infected will climb for another 4-6 weeks before it starts to drops in North America. It took most of the cities in China 20 days to start seeing the numbers go down which is roughly the duration from initial exposure to full recovery. However, the quarantine has been done in a much more drastic way. I have modelled the time estimates based on this article. It is perhaps the most comprehensive piece about the virus available right now.
My prediction is that within 10 days, we will be used to the new status quo and the Italian newly infected numbers will stabilize. The market will react positively to this but the bounce might be short-lived as the recovery will take much longer. The good news is, I believe that the irrational fear would be mostly gone by then. The volatility would drop and the bond market interest rates would converge towards the central bank's discount rates. The bad news is, the macro-economic data will most likely be horrendous.
The severity of the economic impact
This is the first time ever that the entire global economy comes into a halt. The domino effect has already started with the travel, hotel and restaurant industry. The only thing spreading faster than Covid-19 is the layoff and potential bankruptcy of small to medium-size players in these industries. Thousands of businesses are going under and millions of people are losing their jobs.
Consider that there are nearly 80% of people claiming that they are living paycheck to paycheck. The economic impact would be nothing less than devastating. That is why it is so critical for the world's governments to come out and bailout not only Wallstreet via monetary stimulus but more importantly, fiscal stimuli that allow people to pay for essentials such as rent. The worst thing that can happen right now is a complete market meltdown triggered by an insane spike of unemployment and default rate on rent and mortgages that will have a ripple effect on banks and other "unrelated" industries.
The good news is, from the actions proposed this week, I'm optimistic about the governments' responses. They are definitely working in the right direction with direct payments, expanded EI, rent and mortgage relief etc.
The bad news is, we are heading into a recession and we need to try to avoid a full-scale depression. The longest bull market in history has ended. The market will most likely take much longer to recover. It will most likely adjust to macro-economic data and earnings in Q2 and Q3. Depending on the actual vs estimates and the trend that it forms, we will have a much more "stable" and "rational" evaluation of the market. And because different industries are impacted differently, invest in index ETFs might not be the optimal option. Stock picking or at least industry picking will most probably be the best way to go.
*Real Estate:
Since our customers are predominantly real estate investors and we are at the forefront of the impact, I would like to shed some extra light on what's coming. The impact is here. You might not feel it now, but you will feel it by April 1st.
Immediate:
The short-term rental market has completely collapsed. Thousands of listings are being flooded onto the market. The over-supply will put huge downward pressure on medium to high-end rental prices.
Quarantine has immobilized people. Visits have almost completely stopped. If you have vacancies, be prepared to take the hit.
The default rate on rent will increase substantially in April and May for reasons listed above. Keep an eye on government policies regarding potential rent relief and mortgage reliefs.
Mid-Term:
Interest rates on mortgages will decline. You might want to take advantage of the rates to refinance in order to unlock some liquidity. But be careful with over-leveraging.
As the recession hits and unemployment rises, the demand and supply on properties will readjust for both rental revenue and housing prices. We need to re-evaluate and have reasonable expectations.
Long-term
If interest rates stay low, which I believe will. Asset price recovery might be faster than the general economy.
What should we do now?
1. No time for panic. Not because we have a 100-year investment horizon, but because there is absolutely 0 benefit that comes out of panic.
2. Should've, could've, would've. We didn't and that's the end of the story. Don't dwell on your previous mistakes. The last thing you want to do now is making irrational, impulsive decisions.
3. When shit hits the fan, some people run and some people stay. This is the best time to identify true characters and differentiate professionals and bozos. To be fair, almost NO ONE saw this coming. So judging people purely based on results is unfair, but how people react in the time of crisis is probably the best indicator of their abilities.
If you have a financial advisor and/or real estate broker, it is time to seriously evaluate him/her. Did they proactively reach out to you over the last month? Did they give it to you straight? Are they dodging your calls? Do they have an opinion of their own?
Remember, if the wind blows hard enough, even pigs can fly. And the wind blew for a long time over the last decade and the pigs might have taken you for a ride.
4. Re-evaluate your positions with real professionals. If you are lucky enough to have liquidity on the sideline. This is the time to act. Do your homework and be opportunistic.
5. Be optimistic. Put things into perspective. A wise man once said: "Today is difficult, tomorrow is much more difficult, the day after tomorrow is very beautiful."
P.S: If you are interested in my articles, I will be spending some time writing more about investment fundamentals in the next few weeks. I have been wanting to do so over the last few years, it only took a quarantine and economic meltdown to actually put it into work.